In the wake of expanding demand for their cars, Japanese manufacturers, Toyota and Honda, have expanded production at existing factories and established new plants in North America. In June 2006, Honda announced a new $550 million factory, creating 2,000 jobs, at Greensburg, Indiana. Meanwhile, US manufacturers, General Motors and Ford, facing declining demand, have offered incentives for workers to quit, so as to reduce production capacity. (10 points)

a.Suppose that, in the short run, Ford and General Motors compete on price to sell differentiated products. If GM increases price discounts, how should Ford adjust prices?

b.Explain the Prisoner's Dilemma. Provide examples using the case above.